When you purchase an electric vehicle, you are eligible for a federal tax credit of up to $7,500 if you file your income tax return.
But to qualify, you’ll need to know which vehicles qualify and how the credit is calculated. With so much information at your disposal, it’s essential that you do your due diligence before making a purchase.
Battery Materials & Components
The Electric Vehicle Tax Credit is awarded based on the battery materials and components used in an electric vehicle. If a car meets certain criteria (like owner income, MSRP, and battery materials and components), then you could be eligible for up to $7,500 in tax credits.
Under U.S. law, a certain percentage of battery critical minerals must be extracted, processed or recycled within countries with free trade agreements with the U.S. After 2024, vehicles containing any battery component or critical mineral that was extracted, processed or recycled by a “foreign entity of concern,” such as Russia or China – which poses an issue for many automakers due to these two nations controlling much of the global supply of lithium-ion batteries.
Congress has taken measures to guarantee that this requirement does not impede the sale of electric vehicles (EVs). To help guarantee this doesn’t happen, they have passed several bills that promote battery and EV production in America. These include the Inflation Reduction Act which includes a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program as well as $7 billion worth of grants to accelerate battery production.
Last summer, these bills were signed into law with the purpose of providing financial incentives for more electric vehicle (EV) adoption.
In addition, the tax credit has other criteria that must be fulfilled to be eligible. These conditions include that the vehicle be assembled in America and caps on both price and salary for buyers.
These new regulations have created significant international trade issues, as they require foreign manufacturers to source their batteries and battery materials from either the United States or countries with free trade agreements with it. This policy has led some European and Asian nations to demand more liberal sourcing standards in response.
One of the most frustrating aspects of electric vehicle regulations is that there is no effective way for government enforcement. While the US Department of Energy offers a VIN decoder tool, this does not provide consumers with an effective means to determine whether their new or pre-owned EV meets sourcing requirements.
Unfortunately, until the US Treasury provides clarity on these eligibility requirements, it’s impossible to know if your new or used electric vehicle will qualify for the EV tax credit. This has created much confusion and may have hindered EV adoption overall.
Although the tax credit is an encouraging step towards cleaner transportation, it remains uncertain how long these changes will last. It is likely that government authorities will introduce additional sourcing and mineral extraction regulations soon enough, potentially disqualifying many consumers from receiving the benefit.
Final Assembly
Last August, the Inflation Reduction Act went into effect and introduced new requirements for electric vehicles to qualify for the clean vehicle tax credit. These included three sets of standards related to final assembly of EV models as well as the sourcing of battery materials and components. The purpose was to promote domestic production by incentivizing automakers to locate more supply chains and factories within North America.
The final assembly of electric vehicles and their batteries is an intricate process that involves multiple stages in different countries. To be eligible for the tax credit, however, the IRA requires that this final assembly take place in North America.
Since the passage of the IRA, many electric vehicle manufacturers have responded by shifting their production operations to North America and trade partner nations. But this decision not without its challenges.
If you bought a qualifying electric vehicle before the IRA’s passing, you may still be eligible to claim the credit based on old rules that were in effect until August 16, 2022. The new final assembly requirement does not apply before that date; however, in order to guarantee your vehicle qualifies, make sure you have a written binding sales contract.
Additionally, you should be aware of a few other things which could influence your EV’s tax credit eligibility – especially if you purchase either a new or used electric vehicle that doesn’t meet all three requirements described above. These changes include new price and income limits which may make it harder for some consumers to purchase an eligible car under these programs.
Additionally, if your battery minerals and components aren’t primarily sourced from the U.S., then you won’t receive the full $7,500 tax credit; rather, your credit will be limited to half that amount depending on whether they come from a free-trade country or not.
Another change that will make it harder to receive the full $7,500 tax credit is a rule prohibiting vehicles from containing critical minerals sourced from countries of concern such as China. Together these two rules amount to half of the credit limit and will take effect beginning March 2023.
Though IRA’s changes to the electric vehicle tax credit may make it more challenging for some EV owners to qualify, much work remains to be done in this area. One major challenge will be ensuring EV makers can demonstrate their adherence to these new requirements.
Though we lack specifics on how EVs will be finalized and transferred to dealers at point of sale, the IRS and Department of Energy are working on developing guidance that will provide car dealers and their customers with clarity about what needs to be done. We anticipate more information regarding this in March.
Tax Credit
The electric vehicle tax credit is a nonrefundable federal government incentive available to consumers who purchase qualifying plug-in electric or “clean” vehicles (including hydrogen fuel cell EVs). To take advantage of this credit, you must complete Form 8936 when filing your taxes.
The tax credit is worth $7,500 for new electric vehicles and $4,000 for used ones put into service after December 2022. However, it phases out after 200,000 qualifying vehicles are sold by each manufacturer – Tesla and General Motors both nearing this threshold so their eligibility for any portion of the credit will soon end.
Furthermore, several state and local incentives exist to help offset some of the costs of buying an electric vehicle. California’s Clean Air Vehicle program grants carpool lane access to certain EVs, while New Yorkers can take advantage of a state-level rebate in addition to their federal credit.
However, these incentives have limits and cannot be combined. Furthermore, some states may even have income limits for claiming these incentives – so be sure to consult your local tax professionals for more details.
For new electric vehicles sold in 2022, a credit of up to $7,500 may be applied depending on the battery capacity of the car. This amount remains unchanged from 2021 but is subject to an annual cap.
As the domestic electric vehicle market matures, more vehicles may qualify for this credit again. Unfortunately, due to how legislation was written, many models won’t meet the requirements until 2023.
To receive the full $7,500 tax break, vehicles must be assembled in North America and an increasing percentage of battery minerals and components must come from within the U.S. or its free-trade partners.
Some automakers are having difficulty building supply chains that meet these sourcing demands, but this should only serve to create a temporary obstacle and ultimately contribute to an expanded American manufacturing base.
The Inflation Reduction Act removed the 200,000-vehicle cap on manufacturers’ eligible sales, enabling some automakers to offer their own version of the Electric Vehicle Tax Credit. As a result, if you’re thinking about investing in an EV from Tesla, General Motors or Toyota – now could be your best bet!
You may also qualify for a tax credit on a vehicle you lease, which could help reduce your overall costs. However, the IRS has some conditions: you must own the car and it cannot be more than two model years old when taken off the lot.
If you’re uncertain if your current car qualifies for the credit, the IRS has a tool that will tell you. It also helps determine if additional incentives such as those offered by California or New York may apply to you.